Category Archives: China-U.S.

Djibouti Bound

Chinese warships leaving Zhanjiang, Guangdong province, China on July 11, 2017 bound for China’s first overseas military base in Djibouti. Photo credit: Xinhua/Wu Dengfeng.

CHINESE MILITARY PERSONNEL are now en route for Djibouti where they will garrison China’s first overseas military base, which it started building last year at a cost of $590 million.

The photo above shows the departure from Zhanjiang in Guangdong province of the South Sea Fleet’s Jinggang Shan, a Yuzhao class Type 071 amphibious transport dock that had previously been deployed in the search for the missing Malaysia Airlines Flight 370,  along with a second PLA-Navy ship, China’s sole semi-submersible Donghai Island class naval auxiliary ship.

The Horn of Africa country, only half as big again as municipal Beijing, is already home to US, French and Japanese military bases with a Saudi Arabian one, like China’s, under construction.

China’s base will be used for supporting peacekeeping (Beijing has deployed its first UN peacekeeping combat troops in South Sudan), international anti-piracy operations off the Somali coast and in the Gulf of Aden (in which China has taken part since 2008) and humanitarian aid.

It will also provide advanced support, should it be needed, for the more than 250,000 Chinese now working in Africa — and the Chinese investments where they work. Evacuations of nationals have already been needed in Libya and Yemen.

China stresses that Djibouti will be a logistics or support, not military base. The question is, however it is described, whether it is the first of one, several or many such overseas beachheads.

The US defence department’s recent annual report to the US Congress on China’s military prowess took this definitive view:

As China’s global footprint and international interests have gown, its military modernization program and become more focused on supporting missions beyond China’s periphery, including power projection, sea land security, counterpiracy, peacekeeping and humanitarian assistance/disaster relief (HA/DR). In February 2016, China began constitution of a military base in Djibouti that could be complete within the next year. China likely will seek to establish additional military based in countries with which it has long-standing, friendly relationships.

The US defence department pinpoints Pakistan as best fitting that bill. Given the growing economic interests at stake in the China-Pakistan Economic Corridor, which runs through both some insecure but strategically important territory, and China’s extensive role in building a deep-water port at Gwadar on the Arabian Sea coast, that seems a logical deduction.

However, many other countries will not be receptive to the notion of hosting PLA bases, and Chinese military doctrine sees prowess in cyber, space and information warfare as more potent than building a traditional network of military allies.

Indeed, current doctrine sees power projection assets as a vulnerability in modern warfare. That alone will be cause for China to move cautiously on establishing further bases.

At the same time, Beijing will use China’s economic linkages to cement support among those with similar security interests and to deter adversary power projection in third countries, particularly that by the United States.

For now, gaining access to foreign commercial ports for as a logistics base and for pre-positioning of support of “far seas” deployments by the PLA-Navy is likely to be the order of the day. That, anyway, is what would be needed for the HA/DR operations that Beijing is likely to concentrate on while its military learns to find its way around the world.

Leave a comment

Filed under China-Africa, China-Pakistan, China-U.S., Defence, Uncategorized

Trump Hands Beijing Clear Skies For Global Climate Leadership

Air pollution at sunset, Shanghai, China, 2008

THE UNITED STATES’ withdrawal from the Paris climate accord, newly announced by US President Donald Trump, formally opens space for Chinese and European leadership on the issue that has been expanding ever since candidate Trump denounced climate change as a Chinese hoax designed to weaken US industry.

Having committed on the campaign trail to withdrawing the United States from the deal within 100 days of taking office, Trump now says he will make good on that promise and seek renegotiation of the accord on terms that are not as “draconian” for the United States.

The United States accounts for more than 15% of the world’s greenhouse gas emissions, a share exceeded only by China. Its withdrawal from an agreement that depends on the largest polluters making some of the deepest cuts to emissions inevitably weakens the accord’s chances of success.

During a trip to Germany, Prime Minister Li Keqiang reiterated ahead of Trump’s announcement Beijing’s commitment to the accord. China and the European Union are expected to issue a joint statement to bolster it  in the light of Trump’s abandonment (Update: they did). They are likely to reaffirm their joint commitment to cut back on fossil fuels, develop new green technologies and raise $100 billion a year by 2020 to help poorer countries cut their emissions.

Beijing’s position on climate change has swung through 180 degrees. Once considering international efforts to get it to limit carbon emissions to be an unwanted interference in its internal affairs, China has since become a strong proponent of efforts to halt global warming — and to develop global leadership in climate mitigation technologies.

Li will be familiar with the smog-choked skies above Beijing and a host of other cities (the picture above is of Shanghai). And also with the increasing popular unease at environmental degradation. He made a point of saying that the Paris accord was in China’s self-interest.  Certainly climate change constitutes not just a health challenge to authorities but also an economic and political threat to the Party.

However, it also offers Beijing a tremendous geopolitical opportunity. By not just rejecting the Paris accord but reneging on commitments, Trump hands China an opening to take on global leadership on what may well prove to be the defining issue of the century. Such an offer will not be refused.

Leave a comment

Filed under China-U.S., Environment

High Stakes

THE BYSTANDER SUSPECTS that the aerial incident involving two Su-30 fighter jets and a US WC-135 reconnaissance plane over the East China Sea this Wednesday past has more to do with North Korea than China-US conflicts.

The American plane was on deployment sampling the atmosphere for evidence of nuclear explosions, though Beijing has accused it of unspecified ‘surveillance’ activity in airspace over the Yellow rather than the East China Sea. Whether the flight indicates that Washington is expecting another test by Pyongyang shortly or whether it was a routine radiation measurement flight, we are unsure.

It is sure, however, that the repeated flights by US warplanes near Chinese airspace are a constant irritant to Beijing, to which Washington is disinclined to pay any heed. The last occasion planes from the two sides came dangerously close was over the South China Sea in February. That may have been inadvertent, but an incident in May last year was not.

The risk from such ‘unsafe intercepts’ is a collision as happened in 2001 when a PLA-Navy pilot died after his interceptor jet hit a US Navy signals intelligence aircraft over Hainan Island. Systems were put in place after that to make such incidents less likely, and there are parallel procedures at sea-level for naval vessels. Disaster, though, will always be waiting to happen for as long as these flights continue.

Leave a comment

Filed under China-U.S.

The Sound Of Another Trump Flip-Flop

100 yuan notes

IT IS ALL going rather swimmingly for China with the United States right now. Following the happily smooth summit between President Xi Jinping and US President Donald Trump in Florida last week, the US president has said that China is not manipulating its currency.

During his election campaign last year, Trump had repeatedly accused Beijing of artificially driving down the value of the yuan to increase its export competitiveness, and had said he would label China as a currency manipulator on his first day in office.

His about-turn pre-empts the US Treasury’s forthcoming biannual report to Congress on the foreign-exchange policy of the United States’ principal trading partners: being designated a currency manipulator by the US Treasury legally triggers US Congressional sanctions against the offending country.

In the Obama-era, the Treasury had always found a way to avoid that, but the risk to China once Trump won the election last November was acute.

Trump now accepts that China has not been manipulating its currency for a while. His need to work with Beijing on dealing with North Korea — regardless of his previous comments that the United States would take unilateral action against Pyongyang if China failed to rein in its neighbour as Washington expected — appears to have helped clarify his vision.

Leave a comment

Filed under China-U.S., Economy, China-Koreas

China-America First

US President Donald Trump and China's President Xi Jinping walk in the grounds of Trump's Mar-a-Lago resort in Florida, April 2017.

DONALD TRUMP MARKED his first meeting as US president with the visiting President Xi Jinping with a display of naked American power, Cruise missile strikes against an airfield in Syria in retaliation for the Assad regime’s chemical attack on a hospital. The timing was coincidental, if opportune, but it was an act of defining and defending national interest of which only one of the two superpowers is currently capable, let alone comfortable, in undertaking.

The signalling was palpable. Moreover, it was an action that also had many observers quickly connecting the dots to North Korea, a country Trump had threatened unilateral US action if China did not start to exert the control over its ally that Washington believes it can and should.

Xi’s visit was always going to be scrutinised for the subtle signs of a power play between the two men. The ‘optics’ would be as important as the outcomes. However, it also carried considerable domestic political risk for Xi, making the trip to the United States early in Trump’s presidency (and to a golf course resort, at that) with all the risk of Trump’s unpredictability providing a loss of face for no very certain reward. The deflection of much of the world’s attention elsewhere would not necessarily have been unwelcome.

It is hard, though, to imagine the trip was undertaken without assurances there would be some return. The pre-trip speculation was of an agreement, if longer on affirmation than detail, on a joint reset of tackling North Korea’s nuclear ambition and some public US affirmation to Beijing over arms sales to Taiwan and the ‘one China’ policy.

In the event, the publicly announced outcomes were more modest, though likely of Beijing’s design, a 100-day plan to discuss trade talks directed at boosting US exports and reducing Washington’s trade deficit with China, and an invitation to Trump to make a state visit to China, which the US president accepted for a date to be arranged.

Trade is the lowest-hanging fruit for restoring relations between the two countries to an even keel. The direction of travel favours more US exports to China, especially once the rebalancing of the economy to more domestic consumption takes hold, while the One Belt, One Road initiative, to which the United States has now been asked to join, offers the prospect for more business and investment than China can handle alone.

Difficult issues — North Korea, Taiwan, the South China Sea — offer scant prospect of early harvesting.

The agreement to trade talks is positive, in the sense that it shows Trump can be steered away from his fiery anti-China rhetoric of the campaign trail last year. Further evidence that the reality of office is taking hold over the rhetoric of candidacy is that the Trump administration has so far declined to carry through on pre-election threats to brand China a currency manipulator or impose punitive tariffs on Chinese exports to the United States.

That the US president said that he was willing to further strengthen cooperation with China in economy, military affairs and people-to-people exchanges and support China’s efforts in pursuing corrupt officials who had fled China with ill-gotten gains will all be taken as evidence of success by Xi’s team, whose overarching goal was to restore stability and order to the relationship so they can manage it. Trump’s description of his personal relationship with Xi as “outstanding” will have been a bonus, though Trump will likely find eventually that that friendship will come with trappings.

State media have been quick to present the Florida summit as continuation of policy between the world’s two leading nations. “Expanding win-win cooperation” and “managing differences” and developing “dialogue and cooperation between China and the United States in such areas as diplomacy and security, economy, law enforcement and cyber security, as well as social and people-to-people exchanges” represents a good outcome for Xi, even if it is not the language of concrete gains for American manufacturing workers that reverse trade deficits and job losses that Trump had previously told his blue-collar economic nationalist supporters he laid squarely at China’s door.

The harsh truth is that it is not that group that stands to benefit from growing US trade with China. The winners will be the same ones that were the winners from globalisation.

The longer-term win for Xi is that summit has steered one of the world’s most important relationships, that between China and the United States, further in the direction of an arrangement of international affairs that is based on bilateral relationships between great powers than the post-World War Two system of international rules — something Xi has previously described as “a new model of great power relations” and which aligns with China’s efforts to construct a parallel architecture for global governance with itself in the centre.

The US president, who seems to prefer to focus on winning battles rather than wars, may well not realise what his guest has walked away with.

1 Comment

Filed under China-U.S.

Trump’s Withdrawal From TPP Opens Opportunity For China

THE TRUMP ADMINISTRATION’S withdrawal from the Trans-Pacific Partnership (TPP) free trade agreement opens up space for China to assume leadership of the development of trade and investment within the region.

Its own Regional Comprehensive Economic Partnership (RCEP) goes from being a poor second choice to virtually the only game in town. It limitation is that it encompasses Northeast and Southeast Asia along with Australasia, but not the Americas, the carrot that the TPP offered.

However, without the participation of the United States, the TTP is left floundering, for all the talk from quarters such as Australia that something can be salvaged. That would take several years at the very least.

RCEP would be substantial, accounting for about one-third of global GDP and one-half of the world’s population. It would incorporate all the Asian countries that had signed up for TPP plus TTP waiverers, such as Indonesia, and excluded, such India (not forgetting China itself, of course).

RCEP is considerably less liberalising of trade than TTP, however. The scope for exemptions on awkward sticking points is also greater, which may make reaching an eventually agreement easier, though.

Critically different from the TPP, labour, environmental issues are excluded form the RCEP negotiations, as is the role of state-owned enterprises.

RCEP’s primary focus is the trade in manufactures, although trade in services and investments will be discussed as one at India’s insistence. India is competitive in trade in services though less so in manufacturing and especially light manufacturing. It does not want trade in manufactures to be given priority over trade in services and investment, where its companies are competitive.

Intellectual property rights are also a point of contention. Tokyo and Seoul want high levels of IP protection, particularly for their pharmaceutical sectors, and akin to those proposed by the TPP, whereas poorer countries in the region want access to cheap medicines.

Beijing, however, may have both a short and a long game to play. The high standards proposed under TPP for intellectual property protections and the liberalisation of trade in services may well eventually suit Beijing as it gets more success in rebalancing its economy as a more services-oriented and innovate one.

To that end, it may well be prepared to keep the TPP negotiations lingering on should they be of future use. In the meantime, though, Beijing will seize the initiative that Washington has let drop.

Leave a comment

Filed under China-U.S., Economy

Beijing’s Devaluation Dilemma

 

100 yuan notes

THE CLOCK IS ticking down on the inauguration of US President-elect Donald Trump and thus on Beijing’s decision about if and how to devalue the renminbi. China is caught between an exodus of capital and whatever hawkish policies against it that a Trump administration could bring.

The renminbi fell 7% against the US dollar in 2016, in its biggest fall since 1994. Most of the fall occurred in the fourth quarter as the US Federal Reserve started to raise interest rates.

The case for a one-off step devaluation is that it would, assuming it was large enough, staunch the outflows, and end the need to run down the foreign-exchange reserves to defend the currency. The case against is that Chinese companies with dollar-denominated debt could be put in peril, importers would face a squeeze on margins and Trump’s strident accusations of China being a currency manipulator to support its exporters by undervaluing the renminbi would gain more credence.

Also, a Chinese devaluation could set off a round of competitive devaluations by emerging economies that would rock the world economy. There is ‘previous’ in this regard. Beijing’s unexpected devaluation in August 2015 caused global shockwaves.

At the same time, China’s foreign exchange reserves, being used, regardless of Trump’s claims, to prop up the currency through market intervention, are being eroded. While comfortably large at more than $3 trillion, even they cannot be run down indefinitely. The People’s Bank of China has already used $1 trillion of the reserves to defend the currency, taking them in December to their lowest level in six years.

And what probably matters more is investor sentiment. To that end the central bank earlier this month orchestrated liquidity squeeze in the offshore market in Hong Kong, to make it more expensive to bet against the renminbi, a signal intended equally to be read in the onshore market.

As the devaluation debate rages among policymakers, Beijing has been putting administrative measures in place to reduce the outflows. A stop has been put to the dodge of using investment-linked insurance policies in Hong Kong both to move savings overseas and switch into dollars. The level at which banks are now required to report all yuan-denominated cash transactions has been lowered to 50,000 yuan from 200,000 yuan.

The individual annual quota of $50,000 in foreign currency is unchanged, but citizens are being asked for more detailed information about why they need the cash;  tourism, business travel and medical care and education overseas is looked on favourable, but not purchases of overseas property and financial assets.

Similarly, a closer eye is being kept on Chinese firms foreign direct investment, especially M&A involving real estate, hotels and cinemas. Bitcoin exchanges, which account for 95% of global trading in the crypto-currency, are being leant on to stop a backdoor way to cash out of the yuan. There is even speculation about a crackdown on the excessive transfer fees Chinese football clubs are paying to bring in foreign stars.

In this environment, state-owned enterprises are likely to be leant on to repatriate foreign currency earnings held offshore while foreign firms will find it harder to repatriate their profits.

All of this flies in the face of policies to internationalise the currency that have been persued for some time, and whose continuance was implicit in the IMF’s adding of the renminbi to its basket for Special Drawing Rights last October.

The other conventional prop for a currency is higher domestic interest rates. However, with more than 1 trillion yuan of corporate bonds due to mature every month from now until the third quarter of this year, higher rates would impose a massive refinancing burden on companies.

Also, it is far from clear how much strain higher rates would put on the shadow banking system and what the spillover would be to the rest of the financial system, but the sense is that it is a significant risk.

That leaves devaluation — gradually or in a one-step change — as the most likely option.

In a sense, that is inevitable. Dollar strength globally is probably a bigger factor than renminbi weakness. Last month, however, that did not prevent Trump tweeting, “Did China ask us if it was OK to devalue their currency?” Nor is it likely to do so again.

Financial policymaking is difficult at the best of times, never more so than at a time of unpredictability — and with a clock ticking.

Leave a comment

Filed under Uncategorized, China-U.S., Economy